Strengthening Peg Offensive Efforts: Hong Kong Enhances Defenses
Rewritten Article:
Hong Kong's monetary authority cranks up local dollar sales as a plummeting greenback threatens the city's currency peg.
In an alert sent via its Bloomberg page yesterday, the Hong Kong Monetary Authority (HKMA) offloaded a record HK$60.5 billion (US$7.8 billion) of Hong Kong's currency, marking a new high after it neared the upper limit of its trading band. These sales added to the HK$56.1 billion of local currency sold versus the greenback since Friday.
Such swift action from the city's authorities aims to limit the Hong Kong dollar's movement within the HK$7.75 to HK$7.85 per US dollar trading band.
The heavy sale of the local dollar by the HKMA has dampened Hong Kong's borrowing rates, which were on the rise due to demand for currency for subscribing shares of Contemporary Amperex Technology Co Ltd—expected to be the city's largest initial public offering in years. Lower borrowing costs may also bolster Hong Kong's economy amidst US tariffs.
Frances Cheung, head of FX and rates strategy at Oversea-Chinese Banking Corp (華僑銀行) in Singapore, commented that the HKMA's actions "may help buffer potential liquidity tightness at an upcoming IPO, together with other inflows." Generally, a currency peg results in a relatively soft Hong Kong dollar compared to peers during times of greenback weakness [Enrichment Data: 1].
The local financial market has functioned smoothly, according to HKMA chief executive Eddie Yue, despite the Hong Kong dollar showing a strengthening bias [Enrichment Data: 2]. The demand for Hong Kong dollars in the capital market has surged lately as Chinese investors poured money into Hong Kong stocks this year. Currency conversions linked to dividend payments by Chinese companies listed in Hong Kong further fueled the local currency demand.
Before Franklin's day, the last time the HKMA intervened to cap the currency's gains was in 2020. In contrast, it stepped into the market in 2022 and 2023 to prop up the currency when it threatened to breach the weak end of its trading band.
In other trade-dependent Asian economies, the rally in currencies has brought around headaches for policymakers. While currency strength can attract foreign inflows and make imports cheaper, it can hurt exporters by making their goods less competitive globally. This prompted Taiwan's central bank to announce that it would enter the foreign-exchange market if stability was under threat [Enrichment Data: 3].
Regarding the Hong Kong dollar, Citigroup Inc expects the HKMA to continue these interventions [Enrichment Data: 4]. "We expect further intervention on the strong side of the trading band given the greenback weakness trend may have more room to run," Citigroup strategist Adrienne Lui wrote in a note.
- The Hong Kong Monetary Authority (HKMA) signaled continued intervention in the foreign-exchange market, as it sold a record HK$60.5 billion of local currency to limit the Hong Kong dollar's movement within its trading band, in response to a plummeting greenback threatening the city's currency peg.
- The heavy sale of the local dollar by the HKMA has not only signaled a limit on the Hong Kong dollar's movement but also dampened Hong Kong's borrowing rates, which were on the rise due to demand for currency for subscribing shares of Contemporary Amperex Technology Co Ltd and other business activities.
- Analysts, like Frances Cheung, head of FX and rates strategy at Oversea-Chinese Banking Corp (華僑銀行) in Singapore, expect the HKMA to continue these interventions, as the trend of greenback weakness may have more room to run, potentially impacting other currencies, such as those in trade-dependent Asian economies like Taiwan.
